The Fiscal Cliff: What You Need to Know. Ken Hydock, Esq., CPA Ken Bagner, CPA, MST December 11, 2012

Transcription

1 The Fiscal Cliff: What You Need to Know Ken Hydock, Esq., CPA Ken Bagner, CPA, MST December 11, 2012

2 Affordable Health Care Act Increase Medicare tax on wages and self-employment income of high income taxpayers (wages in excess of $200,000/$250,000 married joint) by.09%.

3 Affordable Health Care Act 3.8% tax on net investment income of high income individuals($200,000/$250,000 married filing joint) Applies to interest, dividends, capital gains, rents and taxable annuity income. Does not apply to Qualified Retirement Plans, IRAs, Roth IRAs and Tax Exempt Municipal Bonds. Investment income does not include amounts subject to self-employment tax but does include passive activity income (partnership income not subject to self-employment). The tax is not imposed on S Corp. income. Medical deduction floor increases to 10%. $2,500 limit on contribution to flex spending account.

4 Individual Taxes Form 1040 Tax Exempt Interest Are you invested enough in tax exempt securities 2013 Surcharge for unearned net investment income including interest, dividends, annuities, royalties and rents

5 Individual Taxes ** - Assumes you live in lovely state of NJ with 9% top rate Interest Rate Tax-Exempt Taxable 1% 2.10% 2% 4.20% 3% 6.30% 4% 8.40% 5% 10.50% 6% 12.61% 7% 14.71% 8% 16.81%

6 Individual Taxes Investments Traditionally you want to sell securities at a loss to offset capital gains Consider selling securities at the end of 2012 at a gain to avoid paying 3.8% tax. (Difference 23.8% to 15%( There are no wash sales rules for gains! Buy it right back.

7 Individual Taxes Investments Dividend paying stocks Consider converting more of portfolio from dividend paying stocks to long-term growth strategy in the beginning of 2013 Convert early to reap benefits of upswing in market Rates will be heading from 15% on qualified dividends to 39.6% plus 3.8% surcharge on top bracket Taxpayers will want a tax-strategy to avoid paying these rates and will want to re-allocate their assets

8 Individual Taxes Life Insurance and Roth IRA s May be a big rebound due to new tax rates Annuities generate taxable income and will be subject to 3.8% tax Consider recommending to clients buy life insurance Build up of cash surrender value not subject to tax Life insurance proceeds excludable from taxable Roth IRA s Income tax free/avoids unearned income rules

9 Individual/Business Switch from LLC to S Corporation for active professional business/(excluding real estate) As long as you pay yourself reasonable compensation the active member will avoid self employment taxes on non-comp income Passive investors can argue they are active to avoid new 3.8% tax This will not work in LLC because active investors will be subject to selfemployment tax

10 Individual Taxes Capital Gains Consider income shifting for capital gains to family member with lower tax bracket (Have to give up full rights to assets) Transfer securities to family members, if you have the right family dynamics, and sell gain positions Kiddie tax limits some planning if child is under 24 attending college or under 19 years old. 0% capital gains tax rate in 2012 for individuals in 15% tax bracket or lower. Can provide significant tax savings before new tax rates kick in.

11 Individual Taxes Capital Gains/Losses Do you have any significant capital transactions other than securities sales during the year If you have large capital gain positions consider selling loss positions to offset gains Review for significant loss carryovers Consider selling gain positions to offset loss carryovers.

12 Individual/Business Real estate professional election Taxpayers can make an election to treat all real estate as one activity if they have more than 750 hours of services during the year Switching from passive to active will avoid the 3.8% tax

13 Sunset of Bush Era Tax Cuts Top tax rate goes from 35% to 39.6% Long Term Capital gains rates go from 15% to 20% Qualified dividend rate goes from 15% to 39.6%. Claw-back of itemized deduction.

14 Combined Impact 44.6% rate on investment income including qualified dividends 24 + % rate on long term capital gains 39.6% on ordinary income

15 Expiring Provisions Depreciation 50% bonus % bonus % employee reduction in Social Security tax which brought the rate from 6.2% to 4.2%; a savings of about $2,000

16 Planning Accelerated long term capital gains Defer losses Accelerate ordinary income Invest in Tax Exempt Municipal Bonds

17 Healthcare Reform Benefits and Coverage Group Health Plan and Health Insurance Issuer Provide applicants, enrollees, policyholders or certificate holders Copy of Summary of Benefits and Coverage Notice of Modifications of Plan or Coverage Not later than 60 days prior to date modification becomes effective Failure to Provide Up to $1,000 a failure (Each enrollee = separate offense)

18 Healthcare Reform Benefits and Coverage What needs to be included Description of the coverage Exceptions, reductions and limitations on coverage Cost-sharing provisions of the coverage, including deductible, co-insurance and copayment obligations Renewability and continuation of coverage provisions Coverage examples specified by joint regulations Statement that SBC is only a summary Contact information for question/instructions for obtaining copy of plan/policy Internet address for obtaining uniform glossary, contact phone number to obtain paper copy, and disclosure that paper copies available upon request.

19 Healthcare Reform Benefits and Coverage When to distribute Enrollment First date when participant is eligible to enroll for coverage Changes to SBC By first day of changed coverage Within 90 days after enrollment for special enrollment event (Marriage, birth of child, loss of coverage) Open Enrollment period if opportunity for participant to change coverage options or maintain coverage Renewal Automatic SBC must be distributed no later than 30 days before beginning of plan or policy year Within 7 days of participant or beneficiary request

20 Healthcare Reform Benefits and Coverage How to distribute Must be in writing unless electronic Electronic allowed if format is accessible, paper is provided free of charge upon request, participants have effective means to access documents (Part of job to use electronic information system) If no knowledge of separate address for beneficiary SBC may be provided to participant in electronic form Template from DOL

21 Healthcare Reform FSA $2,500 limit for plan years beginning in 2013 (Was $5,000) Two spouse allowed to make $2,500 each even if with same employer Doesn t apply to employer non-elective contributions Prior year coverage can be used for this year and does not apply against limit Must amend Cafeteria Plan by December 31, 2014 to reflect new limits

22 Healthcare Reform W2 Reporting 2012 Mandatory unless small employer (Under 250 W-2 s in preceding year) Exemption available until further notice Controlled Group rules not applicable for W2 limit What to report Aggregate Cost of Employer-Sponsored Coverage Includes employer and employee dollars (pre or after tax) COBRA period not required to be reported

23 Healthcare Reform Exchanges Small Business Health Options (SHOP Program) employees can purchase insurance through exchanges Provides at minimum essential health benefits Ambulatory patient services, Emergency services, hospitalization, maternity and newborn care, mental health and substance use disorder services including behavioral health treatment, prescription drugs, rehabilitative and habilitative services/devices, laboratory services, preventive and wellness services and chronic disease management, pediatric services, including oral and vision care.

24 Healthcare Reform Exchanges Notice Requirements Existence of exchange and how to contact exchange Where employee may be eligible for premium tax credit Effect on employee if purchases plan through exchange Notice required by March 1, 2013 Guidance coming from DOL for notice NJ is in process of creating the exchanges

25 Healthcare Reform Medical Loss Ratio/Reporting/Rebates Percentage spent on medical care and health care quality improvement Small Group and individual plans must spend 80% of premium dollars on medical care and quality improvement activities Large Group 85% Rebates Required each year by August 1 st for prior year Can be sent directly by insurance company, can be sent by employer to employees via check, or can be applied to reduce premium costs for participant for the next year.

26 Healthcare Reform Employer Penalties/Credits Failure to provide health coverage, affordable coverage and minimum essential coverage to employees/dependents Applicable for Large Employers (Penalty) 50 full-time equivalents Seasonal workers excluded if less than 120 day period Controlled group rules apply for participant count Full Time Equivalent measured monthly (# of hours of service of non full time / 120). Equivalents not included in penalty calculation Penalty (Pay for Play) - $2,000 for each full-time employee less 30. Example 50 full time employees penalty would be $40,000

27 Healthcare Reform Employer Penalties/Credits Determined on month to month basis Inflation adjustment after 2014 for penalty Penalty Unaffordable Coverage/Minimal Value Lessor of $3,000 for each full-time employee or $2,000 minus thirty Minimum Value = Plan benefits cover < 60 percent of such costs Minimum Affordability Can t exceed 9.5 percent of household income for taxable year. Waiting on guidance on what this means

28 Healthcare Reform Employer Penalties/Credits Small Business Tax Credit Fewer than 25 Full time employees and average annual wages less than $50, to % maximum credit (25% tax-exempt employers) Reduced significantly as you reach 25 Full Time or $50,000 of wages. Employer must pay for at least half of the premiums

29 Healthcare Reform Grandfathered Plans Coverage provided by group health plan which employee was enrolled on March 23, 2010 Requirements that do not apply Coverage of essential health benefits Coverage of preventive services, immunization and screenings, without cost sharing Disclosure of cost sharing information to enrollees and claims payment policies and enrollee rights to Federal Government and State insurance commissioner

30 Healthcare Reform Grandfathered Plans Non-discrimination by fully insured plan in favor of Highly Compensated Employees Provisions of effective internal appeals process for coverage determinations and claims and compliance with any applicable state external review process Right of individual to select primary care physician, or pediatrician Non-discrimination in premium rates Guaranteed availability of coverage Guaranteed renewability of coverage Non-discrimination against health care providers

31 Healthcare Reform Grandfathered Plans Prohibition against issuers dropping coverage for individuals participating in approved clinical trails Maintaining Grandfather Status Must cover at least one employee since March 23, 2010 Plan materials must state employer believes plan is grandfathered Terms of plan as of March 23, 2010 must be documented and provided upon request New contract does not destroy grandfathered status

32 Healthcare Reform Maintaining Grandfathered Plans Plan must not eliminate benefits to diagnose or treat particular condition Plan must not raise March 23, 2010 con-insurance (ex: 20% hospital bill) Plan must not increase March 23, 2010 co-payments by greater of $5 or percentage equal to medical inflation plus 15 percentage points Plan must not increase March 23, 2010 deductibles b more than percentage equal to medical inflation plus 15 percentage points Plan must not decrease March 23, 2010 percentage of premiums paid with employer dollars by more than 5 percentage points Plan must not add or tighten annual limit on what insurer pays compared to March 23, 2010 plan Plan must not be merged with another plan to avoid health care reform

33 Healthcare Reform Action Plans Summary of benefits and coverage Medical plan amendments for preexisting conditions and children up to age 26 Analysis of grandfathered status MLR rebates By 01/31/13 W-2 reporting of aggregate costs By 03/01/13 Notice to employees of health care exchange rights By 01/01/14 Penalties on employers By 12/31/14 Health care FSA Amendment

34 Contact Information Ken Hydock, Esq., CPA, Sobel & Co., LLC Kenneth Bagner, CPA, MST, Sobel & Co, LLC